Help Reduce the Tax Impact
Whether you're just getting ready to enroll in the Plan or you're nearing retirement, one of the key considerations when making decisions about your money is the impact of taxes.
Benefits of participating
Participating in the Plan on a pre-tax basis means you're already reducing the impact of taxes on your investments. When your paycheck contributions are taken on a pre-tax basis your taxable income is lower, which means you may avoid being placed in a higher tax bracket.
When you choose to make Roth 457 contributions, you'll pay taxes upfront when your money goes into the Plan. Then you'll enjoy tax-free withdrawals – as long as you're at least 59½, and do not take withdrawals from your Roth 457 account for at least five years after your first Roth 457 contribution is made to the Plan.
However, since tax rates are predictable, some financial planners recommend considering a strategy like tax diversification.1
Who knows what tax rates will be in 10, 20 or 30 years from now? Many experts think that up is the only way they could go.2 For this reason, using a tax diversification strategy may help you alleviate tax risk a little more in the long run.
For example, if all of your retirement funds are in a pre-tax account, you may want to consider paying some taxes now through an option like a Roth 457, in case the rates are significantly higher when you retire. Spreading your investment funds between pre-tax and the Roth investment options may help to balance the tax risk in the long run.
Managing taxes in retirement
If you're approaching or already in retirement and you've invested consistently to build your retirement savings, the last thing you want to do is pay more taxes than necessary. Withdrawals from retirement accounts are taxed as regular income, so if you withdraw large lump sums, you may be pushed into a higher tax bracket. The goal is to keep money in your pocket for retirement and reducing taxes could help.
The bottom line
There are no set rules for tax diversification and no guarantee that one particular strategy will work better than another. Investing in different account types that have various tax implications may help to balance your tax risk over the long-term.
Get the help you need
Talk with your Account Executive about a strategy to face the tax impact. *Talk to your tax advisor if you have concerns about taxes and their effect on your retirement investments.
1The Importance of Tax Diversification, Jeff Brown, http://www.mainstreet.com/article/moneyinvesting/taxes/importance-tax-diversification, 03/10/2010
2How to hedge against risk of taxes in retirement, Eileen Ambrose, Chicago Sun Times, 3/11/2011
*Neither the Plan nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions.